Lesson 24 of 25 · 6 min

Reinstatement, and what it does not restore

Passing the test again returns you to compliance and to nothing else, including a bill on a different clock.

When the ratio returns below the threshold, the account leaves the exceptions report and the process ends. The word reinstatement suggests a return to a previous state, and the only thing returned is the test result.

The clearest thing not restored is the holding. A sale of 4,280 shares at $68.35 realises $292,538 and is permanent. If the shares had a cost basis of $21.40, the gain is 4,280 × ($68.35 − $21.40) = $200,946, and at an illustrative combined rate of 23.8 percent the tax is $47,825.15 — payable on the tax calendar rather than the call's calendar, months after the event that generated it, from cash the sale has already been applied to.

Nor is the exposure restored. If the market recovers 18 percent after the sale, the $292,538 that left the account does not participate: $292,538 × 0.18 = $52,656.84 of recovery accrues to whoever bought the shares. The cure was executed at the low end of the price range by construction, since that is what produced the shortfall.

Other things a cure commonly leaves changed:

The advance rate on the remaining holdings, which may stay at its reduced level after the stress that reduced it.
The threshold itself, which may be set lower for the account afterwards: a move from 65 to 58 percent on a remaining $640,000 of collateral cuts the permitted balance from $416,000 to $371,200, a reduction of $44,800.
The composition of the collateral, since the liquid holdings were the ones sold.
Any hedge whose underlying holding was liquidated, as lesson 19 described.

A cure ends a breach. It does not reverse a sale, undo a realised gain, restore a tax lot, or return an advance rate.

Key terms

Reinstatement: The account's return below the maintenance threshold. It resolves the test and no other consequence of the sale.
Realised gain: The taxable profit crystallised by a forced sale, computed against cost basis and payable on the tax calendar.
Post-event terms: Advance rates and thresholds as they stand after a call, which need not return to their earlier levels.

Worked example

What $292,538 of sales left behind

4,280 shares sold at $68.35, cost basis $21.40. Illustrative combined tax rate 23.8 percent. The market then recovers 18 percent.

Proceeds: $292,538
Cost basis: $91,592
Realised gain: $200,946
Tax at 23.8 percent: $47,825.15
Recovery forgone: $52,656.84
Threshold reset from 65 to 58 percent: Permitted balance down $44,800

The test passes again. A $47,825.15 liability, $52,656.84 of forgone recovery and $44,800 of lost capacity are all downstream of a cure that worked.

Check yourself

A forced sale of $292,538 cures a shortfall, and the market then recovers 18 percent. What has reinstatement restored?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.